Mortgage Applications Plummet, Weighing on Bank Stocks

Bank stocks lagged the market today for two reasons.

This morning, the Mortgage Bankers Association announced that applications for home loans fell last week by 11.7% compared with the prior week. The drop was particularly dramatic in the refinance market, which plummeted by 16% on a weekly basis to its lowest level in two years. The volume of applications for purchase-money mortgages slipped by a comparatively reasonable 3%, the trade association noted.

"Mortgage rates reached their highest point in two years last week," said Mike Fratantoni, MBA's vice president of research and economics. "At these rates, many fewer homeowners have an incentive to refinance. ... With this decline in volume, the refinance share dropped to its lowest level in more than two years. Purchase application volume also declined, but not nearly to the same extent, as affordability remains strong."

The problem, as Fratantoni points out, is that mortgage rates have skyrocketed since Federal Reserve Chairman Ben Bernanke intimated in May that the central bank could soon begin to taper its support for the economy. Nine months ago, the average 30-year fixed rate mortgage carried a 3.35% interest rate. Today, the rate is 4.46%. As my colleague Morgan Housel illustrated here, that makes a big difference in terms of the size of your monthly payment.

And if this weren't bad enough for bank stocks -- although, as I've discussed previously, there's also considerable upside to higher long-term interest rates from a bank's perspective -- it was announced yesterday that the Fed will begin subjecting the nation's largest lenders to heightened capital requirements relative to their smaller community brethren. The list of institutions that will be affected by this includes, among others, JPMorgan Chase(NYSE:JPM), Bank of America (NYSE:BAC), Citigroup(NYSE:C), and Wells Fargo(NYSE:WFC).

At the end of the day, in turn, if you were wondering why the banking industry is lagging the broader market on the eve of the Fourth of July -- the KBW Bank Index(DJINDICES:^BKX) is currently up by 0.08% while the S&P 500 is higher by 0.26% -- it's not necessarily because the nation's largest lenders are unpatriotic. While there is certainly an argument to be made that they are, the more likely culprits for the performance of bank stocks today lies rather in the two things I noted.